Free-float market capitalisation

A company's total market value is its share price times all its shares. But a large chunk of those shares may never trade — promoters holding on for control, the government holding a stake it has no plan to sell, or a strategic partner locked in for years.

Free-float market capitalisation strips those locked-in shares out before weighting a stock in an index. Only the shares genuinely available for the public to buy and sell count. A company with a huge total market value but a small free float gets a smaller index weight than its headline size suggests — because a small free float is what an ordinary investor could actually buy.

Under a value-weighted index (section 12.3.2), each constituent's weight is its market capitalisation — or, where the index uses free float, its free-float market capitalisation — divided by the sum of that same measure across all constituents. Free-float market cap = (freely floating shares, not total shares outstanding) × current market price.

Box 12.2 defines free float as a measure of actual availability of stock for public investment, and lists the categories excluded in computing it: broadly, shares held by promoters and the promoter group, government holdings, strategic stakes, and other locked-in or non-tradeable categories the index provider specifies.

Both of India's headline indices switched to this method, on different dates: the BSE Sensex moved from Full Market Capitalisation to free-float with effect from 1 September 2003, and NIFTY 50 shifted to the free-float methodology from 26 June 2009. NIFTY 50 additionally requires a stock's average free-float market capitalisation to be at least 1.5 times that of the smallest existing constituent before it is added. Globally, MSCI weights its indices by free-float-adjusted market capitalisation across countries too.

Illustrative figures. Vasudha Industries Ltd has 50 crore total shares outstanding at a market price of Rs 400, giving a full market capitalisation of Rs 20,000 crore.

Of those 50 crore shares, promoters hold 32 crore (64%) and are excluded from free float; the rest — 18 crore shares (36%) — is freely tradeable.

Free-float market capitalisation = 18 crore × Rs 400 = Rs 7,200 crore — little more than a third of the Rs 20,000 crore headline figure.

If the smallest existing NIFTY 50 constituent has a free-float market cap of Rs 5,500 crore, Vasudha's Rs 7,200 crore clears the 1.5× threshold only if 7,200 ÷ 5,500 = 1.31 — which it does not (1.31 is below 1.5), so on this test alone Vasudha would not yet qualify for inclusion, even though its full market cap looks large.

Chapter 12, section 12.3.2 and Box 12.2, cover free-float market capitalisation as the weighting basis for value-weighted indices, and section 12.4 states the 26 June 2009 NIFTY 50 changeover date and the 1.5× inclusion threshold. Expect a direct computation of free-float market cap from total shares, promoter holding and price, and a question on the inclusion threshold.

• Free float excludes promoter, government and strategic holdings — it is about who cannot readily sell, not about liquidity in the trading sense.
• NIFTY 50's switch date is 26 June 2009 — a specific, examinable date, not "around 2009".
• The 1.5× test compares free-float market cap to the smallest existing constituent, not to the average of all constituents.
• Free-float weighting and the downward bias of price-weighted indices are unrelated problems — free float fixes the promoter-holding distortion; it does nothing about the stock-split effect that price weighting suffers from.
• Do not confuse free-float market capitalisation (a weighting input) with annualised traded value (a liquidity eligibility filter) — an index can use one, the other, or both at different stages of construction.